Concerns grow as rand hits 5-year low

The currency stabilised in afternoon trading but remained well over the 11 mark.

As economists warn of a tough year ahead, the rand’s weakness is blamed on risk-averse sentiment. Picture: Supplied.

JOHANNESBURG - The rand hit a fresh five-year low of R11,25 to the United States (US) dollar during trade on Monday morning.

This came ahead of an interest rate announcement and amid an ongoing strike in the platinum sector and risk-averse sentiment in emerging markets, meaning investors are moving away from developing economies such as South Africa.

The currency stabilised in afternoon trading but remained well over the 11 mark, with economists warning of a tough year ahead for consumers.

Economist Mike Schüssler says there is little optimism for the rand in the currency market.

"At the moment, the weak rand benefits very few people. It benefits the JSE [Johannesburg Stock Exchange], it benefits a few exporters, but for the majority of us, it means higher prices for everyday things.

"I think South Africans are going to find it a very tough year this year. Any further decline is just going to rub salt into the wound."

But the blame for the rand's difficulties can be difficult to lay, with various factors pushing the currency downwards.

The Association of Mineworkers and Construction Union (Amcu) strike in the platinum sector has undoubtedly hit the currency.

The likelihood that America's Federal Reserve will further taper its stimulus programme by another $10 billion is also a major factor for any emerging market as capital flow decreases and investment dries up.

Furthermore, an announcement on interest rates from the South African Reserve Bank (Sarb) is also expected, although most doubt any change will occur.

"We expect the rand to remain at the mercy of emerging market sentiment over the coming week," Absa Capital analysts wrote in a note.

"Hence, even if the Sarb is more hawkish than expected, local strike activity abates or we get another encouraging local trade balance print, the rand is likely to remain on the back foot if emerging market sentiment remains poor."

On the impact of sentiment, Chief Investment Officer for Cannon Asset Management Adrian Saville agrees.

Speaking to 567 CapeTalk/Talk Radio 702's Bruce Whitfield, Saville said sentiment is perhaps the most significant factor in the currency's demise, saying South Africa is otherwise looking rather positive.

"There are some reasons to be anxious about the health of the South African economy [but it's] a very well regulated and well traded currency. So what you're seeing going on here with rand weakness has got to do with much more than just South Africa," he argues.

"If you take the evidence on balance, the South African economy is in reasonable shape. We are running a relatively responsible government balance sheet, the budget deficit isn't runaway, the trade account seems to have been improving, inflation's under control and we've got impeccable monetary policy.

"You add all these ingredients into the argument and I think the rand should hold its own. The real challenge here is sentiment, and sentiment is the great unknown."